So many Canadians are taking advantage of low interest rates right now, and rightfully so. In a historical context money is cheap! In fact borrowing costs are so low right now that many people are forgetting what a normal interest rate schedule looks like. Normalized for peaks and valleys over time, the average cost of borrowing is somewhere between 7 and 10%. That is significantly higher than the current 2 to 3% rates we are enjoying right now. My point is to tread carefully as history WILL repeat itself.
With the above warning in mind it is still is truly a great time to take advantage of some low borrowing costs and use your access to capital to improve your life, just please be pragmatic and objective. Don’t get me wrong. If the perfect Mexican vacation goes on sale or the new line of Designer purses comes out with a “must-have design” I’m not saying don’t splurge here and there… we all need some fun stuff in our lives. Use these low rates to consolidate debt, upgrade your home or get into the market for the first time. just remember that even though money is cheap now, it’s still debt and if debt isn’t managed correctly it can come back to bite you when you least expect it and at the worst times.
When buying a new home one of the most important criteria lenders look at in when evaluating mortgage applicants is their credit rating. You don’t want to find your dream home and then have a lender deny your application because your debt is too high, it could be emotionally devastating. Your closet may be filled with great designer purses to match every occasion, but make sure that they are designer purses that are paid off.
This advice isn’t exclusive for new home buyers. This also pertains to people who are looking to refinance their existing mortgage. Take what happened in the United States recently: borrowers got so comfortable with low interest rates and correspondingly low mortgage payments that they would just spend, spend, and spend far beyond their means and far beyond a safe buffer for future rate increases. When it came down to refinance their homes they no longer qualified for the teaser rates they were accustomed to and to make matters worse the real estate market collapsed leaving them negative equity in their homes. No lender would refinance them and they could not afford the payments even if they could. A terrible situation indeed, can you Imagine?
Protect yourself by ensuring that you can afford your mortgage and other credit. Maybe only buy 1 or 2 purses that you can easily pay off. I am sure that even Kerry from Sex in the City had a shopping limit. Ensure that you can accommodate a 2% rate increase and protect your credit rating vigorously.
So don’t be afraid but have an objective and realistic view of what could happen and where the true risk is at. Industry reports say that Canadian consumers have the highest credit scores in all of North America. But, let’s keep that up and stay smart with managing our debt.